A demand deposit account is an account at a bank, credit union or other financial institution that lets you use or withdraw money whenever you want, without notifying the financial institution ahead of time. Types of demand deposit accounts include checking accounts, savings accounts and money market accounts.
How Do Demand Deposit Accounts Work?
A consumer or business deposits money into a demand deposit account with the expectation that they can withdraw or use funds “on demand” at any time. Money in the account may or may not earn interest.
The ability to tap into these funds isn’t unlimited, though. A financial institution may set a daily limit for withdrawals, for example. In addition, you normally can withdraw or use money in that account only if your balance is sufficient. Trying to access money beyond the available balance may lead to overdraft fees or rejected transactions.
To put money into a demand deposit account, you can:
— Deposit cash or a check at a financial institution.
— Deposit cash or a check at an ATM.
— Deposit a check with a mobile app.
— Set up direct deposits on items such as paychecks and government benefit checks.
Funds deposited in a demand deposit account can then be accessed in a number of ways, including direct withdrawals through a branch or ATM, electronic transfers, debit card transactions, written checks or by setting up automatic payments for bills.
Types of Demand Deposit Accounts
The three main types of demand deposit accounts are savings accounts, checking accounts and money market accounts.
Checking Accounts
Checking accounts are primarily geared toward paycheck deposits, government benefit deposits, bill payments and everyday expenses. These accounts typically pay little to no interest.
Among the types of checking accounts are:
— Traditional checking accounts that don’t pay interest
— Interest-earning checking accounts
— Business checking accounts
— Student checking accounts
— Senior checking accounts
Features of a typical checking account include debit cards, ATM access, check-writing privileges, online banking, direct deposits, mobile check deposits, wire transfers and overdraft protection.
[See: Best High-Yield Checking Accounts]
Savings Accounts
Someone generally opens a savings account to help meet short-term or long-term financial goals. In other words, this kind of account isn’t designed to cover day-to-day expenses. As a result, an account holder might not “demand” access to a savings account as often as they would a checking account.
Savings accounts generally provide more limited access to your money as checking accounts. For instance, savings accounts normally don’t provide checks or debit cards. In addition, a financial institution might restrict the number of monthly withdrawals or transfers you can make from a savings account.
Unlike most checking accounts, savings accounts generally pay interest. High-yield savings accounts earn higher interest rates. In some cases, you might need to maintain a minimum balance to earn the best rate.
[See: Best High-Yield Savings Accounts]
Money Market Accounts
Money market accounts often pay higher interest rates than savings accounts while also allowing you to write checks or transfer funds similarly to a checking account.
However, money market accounts may have restrictions on the number of withdrawals or transactions you can make by check, debit card or electronic transfer.
Money market accounts also may require a minimum deposit.
Demand Deposit Accounts vs. Time Deposit Accounts
While demand deposit accounts let you withdraw money at any time, time deposit accounts require a maturity period before you can withdraw funds.
The most popular type of timed deposit account is a certificate of deposit, or CD. In exchange for keeping money in a CD for, say, 12 months, a financial institution generally pays a higher interest rate than you’d earn with a savings account or other demand deposit account.
Most CDs hit you with a financial penalty for withdrawing money before the CD’s maturity period ends. So, if you take money out of a 12-month CD before the maturity period ends, you’ll likely lose some of the interest you earned.
How Do You Open a Demand Deposit Account?
Instructions for opening a demand deposit account vary from one financial institution to another, but here are the basics:
— Pick a financial institution. Shop around to see where you want to open the account. Look at interest rates, ATM access, account features and other factors before settling on a place to park your money.
— Assemble documentation. To open the account, you normally must provide proof of your identity, your Social Security number, address and other personal information.
— Select the account. Based on your needs, decide whether you want to open a savings, checking or money market account. Be sure to explore fees, minimum balance requirements and minimum deposit requirements.
— Fill out your application. You may be able to complete the application online or in a local branch.
— Put money into your account. Some financial institutions might require a minimum initial deposit, while others may let you open an account without depositing a single penny.
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What Is a Demand Deposit Account? originally appeared on usnews.com
